Overview: Iran’s economy is dominated by the oil industry, which is part of the state sector. The state also owns and administers several large industries. The private sector includes automobile, textile, metal manufacturing, and food-processing factories as well as thousands of small-scale enterprises such as workshops and farms. Smuggling and other illegal economic activities occupy an increasingly large part of the overall economy. The economic reform programs of presidents Ali Akbar Hashemi Rafsanjani (in office 1989–97) and Mohammad Khatami (in office 1997–2005) aimed at making Iranian industry more competitive internationally. Measures included selling off government enterprises, reducing subsidies, creating an equitable income tax system, and cutting high tariffs that protect local manufacturing from foreign imports. Private business interests strongly opposed many reforms and were able to block their enactment. A dominant share of Iran’s non-petroleum industrial output is controlled by semi-private charitable organizations called bonyads, which exert considerable influence on economic policy through their close links to powerful politicians. Traditional import-export merchants, collectively known as the bazaar, also occupy an influential place in economic policy making. Because 80 percent of export earnings come from oil and gas and accrue to the government as revenue, world prices for those commodities have a major impact on Iran’s budget. Government economic planning is done in five-year development plans, the fourth of which began in 2005. Although economic diversification has been a goal in the early 2000s, little progress has been made in that direction.
Gross Domestic Product (GDP): In 2005 Iran’s GDP was estimated at US$182.5 billion, an increase of 5.6 percent over the 2004 figure, yielding about US$2,680 per capita. In 2004 GDP increased by 4.8 percent. For 2006, GDP growth was projected to be 4.8 percent. In 2005 services contributed 45 percent, industry 43 percent, and agriculture 12 percent of GDP.
GOVERNMENT Budget: Budget deficits, largely caused by extensive state subsidies of commodities such as food and fuel, have been a major problem. Iran’s 2005 budget included a deficit of US$11.6 billion based on revenues of US$48.8 billion and expenditures of US$60.4 billion, including US$7.6 billion of capital expenditures. Backed by increased oil prices, announced outlays in the 2006 budget were about 50 percent more than those in 2005.
Inflation: The government’s anti-inflationary policies have reduced inflation from the 1999 rate of 30 percent. The rate for 2003 was 17.6 percent. The rates for 2004 and 2005 were 16.8 and 16.0 percent, respectively.
Agriculture: Iran’s diversity of terrain and climate enable cultivation of a variety of crops, but in 1998–2000 severe droughts cut agricultural production. Output has recovered slowly since, although many villages in eastern Iran have been abandoned, and consequently the area under cultivation has decreased since 2000. In the early 2000s, about 20 percent of Iran’s arable land remained uncultivated. Iran is a net importer of grains, especially rice and wheat, and a net exporter of fruits, nuts, and various specialty crops. Iranians grow a variety of crops: wheat; rice; barley; pistachio nuts, almonds, hazelnuts, walnuts, and other nuts; oilseeds; legumes; dates; citrus and other tree fruits; grapes; melons; vegetables; saffron; sugar beets; tea; cotton; and tobacco. About one-third of agricultural income comes from livestock; with the exception of sheep and goats, which graze on open rangeland, most livestock is raised in fenced pastures.
Forestry: Iran has only about 1 percent forest cover. The major commercially useful forests are located in the Alborz Mountains in the north, especially on the southern slopes above the Caspian Sea coast. Smaller forests, principally of oak and other deciduous trees, are scattered throughout the western and central Zagros Mountains. Iran is a net importer of timber products. Illegal clear-cutting and clearing for agriculture have depleted forests in the Alborz, and government replanting programs have been hindered by illegal harvesting of trees. In 2003 the timber industry produced about 13 million cubic meters of wood products, of which about 37 percent was pulpwood and 24 percent logs.
Fishing: Iran has a long tradition of fishing in the Caspian Sea, in the Persian Gulf, and on inland rivers. The government company, Shilat, establishes fishing quotas and buys fish for processing. Most of the actual fishing is undertaken by small-scale, private fishermen. The most economically important product of the fishing industry is caviar from Caspian Sea sturgeon. In the 1990s, the sturgeon catch declined as a result of over-fishing and poaching. Iran has an aggressive fish nurseries program aimed at reversing the decline in Caspian fish stocks. Other products of the fishing industry are tuna, the sardine-like kilka, trout, and shrimp. In 2002 some 325,000 tons of fish, mainly tuna and shad, were caught, and 77,000 tons were raised by aquaculture.
Mining and Minerals: In 2001 Iran’s already sizable oil reserves were bolstered by the discovery of a large new offshore field near Abadan at the head of the Persian Gulf. However, oil recovery percentages in existing fields lagged in the early 2000s. The largest natural gas field is South Pars, discovered in 1988 in southern Iran and under intensive development in the early 2000s. The centers of copper extraction are Kerman and Bafq. Iran has an estimated 5 percent of the world total of copper, and production of that metal has increased rapidly since 1993. Some 128,500 tons were extracted in 2000–2001, and plans called for substantial expansion in the early 2000s. Other major metal ores are aluminum, uranium, and zinc.
Industry and Manufacturing: Iran’s manufacturing output was reduced during the 1978–79 Revolution, but the 1980–88 war with Iraq had the indirect consequence of increasing industrial production. In the 1990s, growth was hindered by low private investment levels, although government expenditures based on revenues from high world oil prices stimulated public investment and also directly stimulated consumer demand and the petrochemicals industry. That industry, dominated by the state-owned National Petrochemicals Company, has grown rapidly, with output in 2002 worth US$1.4 billion. The Fourth Economic Development Plan (2005–9) calls for a fourfold expansion of petrochemical output, to 56 million tons per year. The industry has received substantial foreign investment. The steel industry, centered in Ahvaz, Esfahan, and Mobarakeh, also has grown rapidly since 1990. The output goal for 2004 was 8.5 million tons. Automobile manufacture has benefited from licensing agreements with European and Asian manufacturers. In 2002 the largest plant, Iran Khodro, built about 260,000 units, and several smaller facilities produced a total of about 240,000 vehicles. Processing of agricultural products also is an important industry and is dominated by domestic private firms. Among the major subsectors are grain processing and fruit and vegetable canning. The textile industry, based on domestic cotton and wool, employed about 400,000 people in 2000. The construction industry has grown rapidly since 2000 because of government investment in infrastructure projects and increased demand for private housing.
Energy: Iran possesses abundant fuels from which to generate energy, ranking second in the world in natural gas reserves and third in oil reserves. Nevertheless, in 2005 Iran spent US$4 billion dollars on fuel imports, mainly because of inefficient domestic use. Oil industry output averaged 4 million barrels per day in 2005, compared with the peak output of 6 million barrels per day reached in 1974. In the early 2000s, industry infrastructure was increasingly inefficient because of technological lags. Few exploratory wells were drilled in 2005.
In 2005 a large share of Iran’s natural gas reserves were believed to remain untapped, although gas already accounted for nearly one-half of energy consumption. With massive government investments planned, the share of gas in energy production was expected to rise quickly in ensuing years.
By 2004 the addition of new hydroelectric stations and the streamlining of conventional coal- and oil-fired stations increased installed capacity to 33,000 megawatts. Of that amount, about 75 percent was based on natural gas, 18 percent on oil, and 7 percent on hydroelectric power. In 2004 Iran opened its first wind-powered and geothermal plants, and the first solar thermal plant was to come online in 2009. Demographic trends and intensified industrialization have caused electric power demand to grow by 8 percent per year. The government’s goal of 53,000 megawatts of installed capacity by 2010 is to be reached by bringing on line new gas-fired plants financed by independent power producers, including those with foreign investment backing, and by adding hydroelectric and nuclear power generating capacity. Iran’s first nuclear power plant at Bushehr, scheduled to come on line in 2002 but not completed as of early 2006, has received international criticism because of concerns that its enriched uranium and spent fuel can be diverted for the production of nuclear weapons. In 2005 Iran’s electricity imports were greater than its exports by about 500 million kilowatt-hours; exchanges were made with all neighboring countries except Iraq.
Services: In the financial sector, Iran’s banking system was nationalized in 1979. Private banks were not authorized to re-open until the early 2000s, when some small private credit institutions appeared. All state and private banks are strictly overseen by the Central Bank of Iran, also known as Bank Markazi. Accounts of the state-owned commercial banks are dominated by loans to state and bonyad enterprises and to large-scale private firms. Wealthy Iranians use foreign banks, especially for savings accounts. The Fourth Five-Year Economic Development Plan (2005–9) calls for the introduction of foreign banks, but such a move has met with substantial resistance.
The trading of shares on the Tehran Stock Exchange was limited between 1979 and 1986, but activity has increased sharply since 2002. The tourism industry was disrupted by the 1978–79 Revolution and the Iran-Iraq War (1980–88) but began to revive in the 1990s.The majority of the 300,000 tourist visas granted in 2003 were obtained by Asian Muslims, who presumably intended to visit important pilgrimage sites in Mashhad and Qom. Several organized tours from Germany, France, and other European countries come to Iran annually to visit archaeological sites and monuments. The government reported that in 2004 some 4 million tourists spent nearly US$2 billion in Iran, an increase of 10 percent over 2003. However, in the early 2000s the industry still faced serious limitations in infrastructure, communications, regulatory norms, and personnel training.
Labor: In 2005 an estimated 14 percent of Iran’s labor force of 23.7 million were unemployed; the unemployment rate was much higher among younger workers, and underemployment was common. The Fourth Economic Development Plan, which began in 2005, aimed to create 700,000 new jobs per year, but unemployment remained unchanged during the first year of that plan. Skilled labor has been in short supply. In 2001 some 45 percent of the labor force was employed in services, 30 percent in agriculture, and 20 percent in industry. In 2005 the minimum wage, determined by the Supreme Labor Council, was about US$120 per month. That level provoked substantial labor unrest in 2005.
Foreign Economic Relations: Since 1996 the United States has maintained the Iran-Libya Sanctions Act, which is a full trade and financial transactions embargo against Iran, although the embargo was relaxed in 2000 to permit U.S. companies to import Iranian carpets, caviar, and pistachio nuts. Other countries, including members of the European Union (EU), have continued trade with Iran, but Western countries have blocked the export to Iran of dual-use items, such as computer equipment, with potential military applications. In the early 2000s, China emerged as an important trade partner both in imports and exports. Japan retained the position that it assumed in the mid-1990s as Iran’s best export customer. In order of volume, the main purchasers of Iran’s exports in 2004 were Japan, China, Italy, South Africa, and South Korea. In order of volume, the main source countries for Iran’s imports in 2004 were Germany, France, Italy, China, and the United Arab Emirates. The main commodities imported are basic manufactures, chemicals, food (chiefly rice and wheat), and machinery and transport equipment. The main commodities exported are petroleum, carpets, chemical products, fruit and nuts, iron and steel, natural gas, and copper.
Trade Balance: In 2005 Iran’s estimated income from exports was US$55.4 billion, 85 percent of which came from petroleum and natural gas. The estimated payment for imports in 2005 was US$42.5 billion, yielding a trade surplus of US$12.9 billion. Between 2003 and 2005, the value of Iran’s exports, chiefly oil, increased faster than the value of its imports, expanding the 2003 trade surplus of US$4.4 billion.
Balance of Payments: In 2005 Iran’s current account balance, determined mainly by its merchandise trade surplus and its smaller services trade deficit, was US$8.2 billion. Its foreign exchange reserves, determined primarily by oil prices, were estimated at US$40.0 billion in 2005. Records on portfolio investment are not available, and foreign direct investment has remained relatively small. In 2004 the overall balance of payments was US$3.5 billion.
External Debt: In 1991 Iran’s external debt was estimated at US$23 billion. During the next decade, Iran paid the debt down, reaching US$7.8 billion in 2001. Subsequently, the debt has risen as international borrowing has increased. The 2005 estimate was US$16.9 billion, compared with US$10.2 billion in 2003.
Foreign Investment: Foreign investment has been hindered by unfavorable or complex operating requirements in Iran and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. In the early 2000s, foreign investors have concentrated their activity in a few sectors of the economy: the oil and gas industries, vehicle manufacture, copper mining, petrochemicals, foods, and pharmaceuticals. The most active investors have been British, French, Japanese, South Korean, Swedish, and Swiss companies. The Swedish Svedala Industri has played a major role in developing Iran’s copper mines since the late 1990s. The Kia, Nissan, Peugeot, and Renault auto companies have licensing agreements with Iranian auto manufacturers. Nestlé of Switzerland and Coca-Cola and Pepsi-Cola of the United States have joint ventures with Iranian companies. Total, Shell, and Lucky Goldstar of South Korea have been active in Iran’s natural gas industry. Iran’s constitution prohibits direct concession of petroleum rights to foreign investors. In the 1990s and early 2000s, some indirect oilfield development agreements were made with foreign firms. French and South African firms gained major telecommunications contracts in 2004 and 2005, respectively.
Currency and Exchange Rate: The value of the rial, Iran’s unit of currency, declined substantially between 2002 and 2005. In 2002 a multiple exchange rate was replaced by a single floating rate. In late March 2006, the exchange rate was approximately 9,140 rials to the U.S. dollar. The tuman, which is worth 10 rials, is the preferred unit of currency in commerce.
Fiscal Year: Established by the Iranian calendar, the fiscal year begins March 21.